General Business Chapter 9

Systems: From Point to Line to Circle

A system is
- an interconnected and coordinated set of elements and processes that converts
inputs to desired outputs.
- it helps everyone to see the big picture, to understand how individual systems
really work and how they interact, and additionally, to understand problems
before trying to fix them.

A point view is a single task which is completed in isolation. A line view is a series of
related tasks which are completed in succession. A circular view is a series of related
tasks which are completed in succession. The results of the effort are analysed and the
insights from this analysis are used to improve quality and efficiency of the next cycle
of the process.
Value Chains and Value Webs
A value chain contains
 all the elements and processes that add value as raw materials are transformed
into the final products made available to the ultimate customer (consumer).

 It starts with the initial producer, which hands the product to supplier. The
supplier processes it to the producer who hands it to the customer and then to
the consumer. This can be managed in two different directions.
The producer driven chain is
o where the dominant and governing firm is a producer with backward and
forward linkages in the chain.
o The dominant company controls key technologies (e.g. computers, automotive).
Within buyer driven chains however
 the key player, the governing firm, is a buyer of products from a string of
nominally independent suppliers.
 This is the characteristics of labor-intensive industries for example clothing and
footwear industries.

Redefining Organizations with Value Webs

Outsourcing means:
 contracting out certain business functions or operations to other companies in
the same country or another country.
Offshoring means:
 transferring a part or all parts of a business function to a facility as a different
part of the company or another company entirely in another country.
Offshore outsourcing is contracting out to another firm in another country.
Business Transformation Systems

If a business wants to transform it needs representative inputs, transformation

components, transformation functions and representative outputs. Various factors
can affect this process.
1) The focus describes the resource or resources that make up the most important
input, like financial means, material, information or people.
2) The magnitude of change is the degree to which the resources are physically
changed.
3) The number of production processes which are employed varies from one or
few for small companies to many for larger companies.

Economies of Scale and Scope

Economies of scale mean
 the increase in output exceeds the increase in input. As a result, an increased
size of operation brings a reduction in unit costs due to increased levels of
specialisation, allocation of fix costs to a broader volume, the learning curve
effects and the ability to buy in bulk or at a lower cost.
Economies of scope are existent when the cost reductions are feasible by combining
activities in companies with a range of products. This can involve the centralisation
of functions such as accounting and finance, marketing and the creation of families of
brands.
The principle of multiples describes the fact that some production processes need
more than one machine and each of these machines has a different capacity. To be
fully efficient, companies are combining various numbers of machines of different
capacities.

Degression of fix costs

Principle of multiples
Companies using more than one machine of different capacities: Company A
- Some production processes need more than one machine 1 of each machine
- Different capacities output per hour = 10
- May need more than one machine to be fully efficient euro

Total cost = 500 euro

AC = 50 euro per unit

Company B
6xA, 3xB, 4xC, 2xD
Output per hour =
60

Total cost = 1750

euro
AC= 29.17 per unit
Production and Operations Management
Production is the creation of goods using the factors of production land, labour,
capital, entrepreneurship and knowledge.
Production management resemble all the activities managers do to help companies
create goods.
Operations management is a specialized area in management that converts or
transforms resources into goods and services.
The objectives of operations are quality, dependability, speed, flexibility and
cost.

They all rely on each other. There are however conflicting objectives in operations
that lead to a trade-off between customer satisfaction and efficient use resources. The
customer for example want a 24/7 availability of goods and services in the required
quantity, but the companies want a low level of stock so they can use their resources
efficiently.
The activities of operations management are
- an attempt to solve the dilemma between customer satisfaction and operating
efficiency to deliver strategic objectives of quality, dependability, speed,
flexibility and cost.
To achieve these strategic objectives, operations management engages in systems
design (product design, forecasting demand, capacity planning, work design, and
location decisions) as well as systems planning and control (operations planning,
scheduling, quantity and quality control, technology control, cost control, and
supply chain management).

Systems Design
The development of a plan for converting an idea into an actual product or service is
called design planning and contains product design, product line, and capacity.
Product design: describes the creation of a set of specifications from which a product
can be produced is called product design.
These are major decisions like styling and function which are product specifications
as well as the range of products and the degree of standardisation. Product design
involves developing a product concept, determining whether it is acceptable to the
customer, as well as feasible and cost effective to the organisation. In many industries
the development of modular systems has increased product variety and customer
choice.
To manufacture a product, different approaches are feasible. Today, mass production
creates identical goods or services usually in large quantities. In a customised
production, the creation of a unique goods or services takes place for each customer.
An alternative option is mass customisation which is a manufacturing approach in
which part of the product is mass produced and the remaining features are customised
for each buyer.
A product line: is a group of similar products that differ only in relatively minor
characteristics.
Capacity: determines the number of products or services that an organisation can
produce in a given time.
Importantly, the required capacity must meet product demand.

Where do New Products come from?

A set of activities intended to identify new ideas that have the potential to result in
new goods and services is called research and development.
Foundationally, basic research uncovers new knowledge, scientific advancement
without regard for its potential use. This is followed by applied research, which
discovers new knowledge with some potential use. Finally, development and
implementation are the activities undertaken to put new or existing knowledge to use
in producing goods and services.

Forecasting Demand and Capacity Planning

Forecasting the demand is based on market information and commonly performed by
the marketing function. Capacity planning uses that input to determine how much
space, equipment, people and finance is needed to meet the forecasted demand. While
capacity planning is influenced by technology, size, structure, hours worked and the
policy on sub-contracting, scheduling means the precise operational level.

Facilities Planning
The process of determining where products or services are to be produced is called
facilities planning. The factors influencing the decision either to use an existing
facility or to construct a new facility are the capacity of the existing facility to handle
the increased demand for production and the cost of refurbishing or expanding the
existing facility compared to constructing a new facility.

Work Design: Plant Layout

In the process layout, small batches of different products are created or worked on in a
different operating sequence (e.g. car repair shop).
In the product layout, all products undergo the same operations in the same sequence
(e.g. assembly line).
The fixed position layout is used in producing a product that is too large to move (e.g.
plane construction).

Location decisions
Besides the plant layout, a company also has to consider the location. Factors
influencing the location are for example availability and cost of skilled and unskilled
labour, quality of life for employees and management, proximity to transport (due to
the locations of major customers), cost of land and construction, and availability and
cost of raw materials and energy. Furthermore, taxes, environmental regulations, and
zoning laws as well as financial incentives from public authorities might be
influencing the decision.

Operations Planning
Operations planning starts with selecting a planning horizon. This is the period,
during which a plan will be in effect, and covers mostly one year. Next, the business
needs an estimation of the market demand. This means the quantity that customers
will purchase at the going price and the estimation of the demand for the planning
horizon. Then, the market demand and the capacity need to be compared. If the
market demand and the facility’s capacity are not equal adjustments may be
necessary. Lastly, an adjustment of products or services takes place to meet the
demand. To sort imbalances out, an increase of capacity to meet demand, ignoring
excess demand or eliminating the excess capacity might be options.

Operations Control
Implementing a sufficient operations control system in any business requires the
effective use of purchasing, inventory control, scheduling and quality control.
Purchasing includes all the activities involved in obtaining required materials,
components, supplies and parts from other firms. The objective of purchasing is to
ensure that the required materials are available when needed, in the proper amounts
and at minimum cost. Factors that affect the choice of suppliers are price, quality,
reliability, credit terms and the shipping costs.
Inventory control is the process of managing inventories in such a way as to minimise
inventory costs. This refers to holding costs (expenditures for storage space and
materials handling), replenishment costs (purchase price of goods, handling charges,
an ordering), and potential stock-out costs (costs of not having inventory available
when needed). Types of inventory are raw materials, work in process (WiP) and
finished goods.

Inventory control methods have evolved over time. Starting with materials
requirements planning (MRP), computerised systems integrated production planning
and inventory control. Subsequently, manufacturing resource planning (MRP II)
extended the planning to the entire organisation by providing a single common set of
facts to be used by all managers to make decisions. An enterprise resource planning
system (ERP) is a sophisticated software system that can monitor inventory and
production and also quality, sales and supplier information. A just-in-time inventory
system means a system that ensures that materials or supplies arrive at the facility just
when they are needed so that storage and holding costs are minimised.
Scheduling is the process of ensuring that materials and other resource are at the right
place at the right time. The routing of materials is the sequence of workstations that
the materials will follow. Timing of materials tells you when the materials will arrive
at each workstation and how long they will stay there. The follow up means that the
manager is monitoring these processes to ensure timely workflows. For complex
products, many operations managers prefer gant charts which are a graphic scheduling
device that displays the task to be performed and the time required for each. Also,
there is the programme evaluation and review technique (PERT) in use which is a
scheduling technique that identifies the major activities necessary to complete a
project and sequences them based on the time required to perform each one.
Quality control defines the process of ensuring that goods and services are produced
in accordance with specifications. The objective is that the organisation lives up to the
standards it has set for itself. Statistical process control (SPC) is a system that uses
sampling to obtain data that are plotted on control charts and graphs to identify and
pinpoint problems in the production process. Statistical quality control (SQC) is a set
of techniques used to monitor all aspects of the production process to ensure that both
work in progress and finished products meet the firm’s quality standards. The
inspection in the end is the examination of the quality of work in process. There are
many ways to improve the quality through employee participation. Quality circles
form a team of employees who meet on company time to solve problems of product
quality. Total quality management (TQM) and six sigma rely on continuous
improvements and statistical data to eliminate defects for products and services. This
is accompanying by world quality standards (ISO) like ISO 9000 and ISO 14000.

Advanced Technologies
Automatisation replaces human labour by the total or near total use of machines used
to do work, Furthermore, robotics use programmable machines to perform a variety of
tasks by manipulating materials and tools. Robots work quickly, accurately and
steadily. They also are effective in tedious, repetitious and hazardous tasks.

Supply Chain Management

SCM is the holistic perspective on the acquisition and movement of materials,
components and information. It incorporates suppliers, organisations and customers,
extends the boundaries of the organisation and is a strategic approach focusing on cost
reduction and added value. A key approach to achieving all these has been through
lean production or lean operations.
Lean production is a specific form of flexible mass production. The focus lies on the
reduction of cost and waste at every stage of the operation while offering more variety
and improved quality. Assembly lines and computer technology is being used to
efficiently produce small batches. Characteristics of a lean supply chain are just in
time, the effective use of subsidiaries and sub-contractors (e.g., Toyota only makes
15% of the parts in-house), and a closer co-operation between the assembler and
suppliers. As an example, Kaizen is a Japanese philosophy which core lies in problem
solving at the source with the involvement and empowerment and time outs to
consider improvements.
Just in time production had its origins in Toyota. Hereby goods and services are only
produced when needed. It is a pull through system which focuses on high volume
output and low unit costs, accompanied by an elimination of costly inventory. To
ensure a close integration between the organization and both suppliers and customers,
its focus lies on teamwork and is associated with continuous improvement and
employee involvement.